Cash flow – the lifeblood of every business.  For your business survival, cash flow is as important as your business’s ability to deliver goods and services.  If you fail to satisfy a customer and lose their business, you can learn from that and make modifications for future customers.  However, if you fail to have enough cash to pay your suppliers, creditors, or your employees, you’re out of business.

Cash flow is the timing of the movement of money.  Inflows occur when you make a cash sale, collect on receivables, have investment income, or borrow money. Outflows are usually generated by paying expenses – payroll, inventory, taxes, purchasing assets and services.  Cash flow is not the same as “profit.”  A company can show a “profit” in its financial statements, but if that profit is stuck in accounts receivable, the company could still have insufficient cash to pay its payroll or daily expenses.

Four basic and important components to examine:

1. Accounts Receivable collections: The longer it takes for your customers to pay on their accounts receivable, the more negative the impact on your cash flow. Stay on top of your collection efforts.

2. Credit policy and terms: Your credit policy is critical. In making decisions on customer credit, you walk the fine line of making sure that your credit policy is not so restrictive that it repels customers, nor so generous that it could negatively impact your cash flow.

3. Inventory: Excessive inventory hurts your cash flow – you’ve spent cash on it that could have been used for other purposes, and you are now bearing the costs of storing, handling, and keeping track of it.

4. Accounts Payable and cash flow: Without payables and trade credit you’d have to pay for all goods and services up front. While many of us prefer to pay bills early in our personal lives, for optimum cash flow management, you’ll need to examine your payables schedule.

Four tips on managing cash flow:

1. Contingency plans.  You should keep three plans at hand.
(1)   Cash flow requirements when business is going according to plans;
(2)   when business is slightly lagging;
(3)   when business is not good.

2. Cash Forecasting.  Forecast, make a budget, and stick to it. Be sure to include expenses that are due periodically rather than monthly, such as insurance premiums. Modify your budget only after thorough ongoing review of your actual cash flow.

3. Spending Controls:  Make sure you carefully negotiate leases and solicit price quotes on an ongoing basis. Periodically analyze operations for cost saving opportunities.

4. Add Employees cautiously:  Actively seek ways to maximize employee productivity. When looking at alternatives such as outsourcing, be sure that you account for the full cost of wages versus costs of outsourced labor, along with other cost variables such as training requirements and length of service required.

Cash flow is the lifeblood of every business.  While profit is vital, cash flow issues can be fatal to a business.  Just as you need to maintain a healthy heartbeat by eating right, exercising and consulting your physician, you must have a firm grasp on monitoring and managing the cash flow pulse of your business.

If you are struggling with tracking your cash flow, or analyzing how to improve it, call us.  That’s what we’re here for.      207-376-3239.